Corporate Diversification Strategy - Strategic Management - Lecture Slides, Slides of Strategic Management

Download Corporate Diversification Strategy - Strategic Management - Lecture Slides and more Slides Strategic Management in PDF only on Docsity! CORPORATE DIVERSIFICATION STRATEGIES Docsity.com Strategic Mgt. In Diversified Companies • The tribal wisdom of the Lakota Indians passed on from one generation to the next, says that when you discover that you are riding a dead horse, the best strategy is to dismount. However, members of modern, corporate management teams have developed new techniques. Docsity.com Overview • What is Diversification • What is senior Mgt’s responsibility in Diversified Companies? • Why and When does a company diversify? • How does a company accomplish it • Related and Unrelated Diversification • When to stop. Docsity.com What is Diversification? • A collection of businesses under one corporate umbrella Docsity.com Diversification and Corporate Strategy • A company is diversified when it is in two or more lines of business • Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line- of-business – A diversified company needs a multi-industry, multi-business strategy – A strategic action plan must be developed for several different businesses competing in diverse industry environments Docsity.com Five Components of Corporate Strategy • Vision- For the corporation as a whole • Goals and Objectives • Structure, systems and procedures – Deploy corporate resources into the businesses – Establish the context for decentralized decision making – Routine public company functions – Contain multiple elements e.g. structure, budgeting,strategic planning, management style etc. Docsity.com Five Components of Corporate Strategy- Resources • Set of tangible and intangible assets, established over time, which can’t be readily imitated, acquired or duplicated. • Make the corporation unique • When they are competitively superior and they contribute to sustainable competitive advantage in the SBU’s, they become a corporate advantage. • Resources, effectively used, create value – One time=restructuring – Ongoing=use of corporate brand Docsity.com Five Components of Corporate Strategy-Businesses and Industries • Industries in which the corporation chooses to compete • Competitive strategies adopted by the business units in those industries. • How the units are related to each other. Docsity.com Why and When does a company diversify? Docsity.com FROM SINGLE-BUSINESS TO DIVERSIFICATION STAGE 1: Most firms begin as small single-business enterprises serving a local or regional market STAGE 2: Geographical expansion STAGE 3: Vertical integration STAGE 4: As growth slows, strategic options include: – Take market share from rivals – Focus on diversification Docsity.com When do we diversify? • When a company runs out of growth opportunities in the core business and not before! • When diversification results in creation of value Docsity.com How to Diversify • Find ways to enter new industries • Decide whether the businesses related to each other or not? • Strengthen the performance of the businesses you’ve got – Get rid of the bad ones that can’t be fixed – Fix the bad ones that can be fixed Docsity.com STRATEGIES FOR ENTERING NEW BUSINESSES 1. Acquire existing firm in target industry 2. Start new company internally 3. Form joint venture Docsity.com ACQUIRING AN EXISTING COMPANY • Most popular approach to diversification • Advantages – Quicker entry into target market – Hurdling certain entry barriers • Technological inexperience • Gaining access to reliable suppliers • Being of a size to match rivals in terms of efficiency & costs • Getting adequate distribution access Docsity.com DRAWBACKS OF JOINT VENTURES • Raises questions about - – Which partner will do what & – Who has effective control • Requires precise agreements Docsity.com Related Diversification • Are the businesses that we are divesting into related to one another and if so, how? Docsity.com Concept: • Exists among different businesses when their value chains are sufficiently similar to offer opportunities • Offers competitive advantage potential of – Lower costs – Efficient transfer of • Key skills • Technological expertise • Managerial know-how – Use of a common brand name • Presence of strategic fit in a diversified firm’s portfolio, along with corporate management’s skill in capturing benefits of the interrelationships makes related diversification capable of being a 2 + 2 = 5 phenomenon Strategic Fit Docsity.com RELATED DIVERSIFICATION & STRATEGIC FIT • STRATEGIC FIT can be based on – Shared technology – Common labor skills – Common distribution channels – Common suppliers & raw materials sources – Similar operating methods – Similar kinds of managerial know-how – Ability to share common sales force – Customer overlap – Any area where meaningful sharing opportunities exist in businesses’ value chains Docsity.com COMMON APPROACHES TO RELATED DIVERSIFICATION • Entering businesses where sales force, advertising, & distribution activities can be shared • Exploiting closely related technologies • Sharing manufacturing facilities • Transferring know-how & expertise from one business to another • Transferring firm’s brand name & reputation with customers to a new product/service • Acquiring new businesses to uniquely help firm’s position in existing businesses Docsity.com Value of Related Diversification Allows a company to enjoy economies of scope Docsity.com Unrelated Diversification • Financially driven rather than Strategically driven • Strategic fit, value chain relationships or strategic theme are not important • Profitability and size are key. • Look for a bargain – undervalued assets, financially distressed, turnarounds, bright future with limited capital Docsity.com Unrelated diversification • Go into any business where we can make a profit • Referred to as conglomerates • No unifying strategic theme Docsity.com APPEAL OF UNRELATED DIVERSIFICATION • Business risk scattered over different industries • Capital resources invested in those industries offering best profit prospects • Stability of profits -- Hard times in one industry may be offset by good times in another industry • If management is exceptionally astute at spotting bargain- priced firms with big profit potential, then - – Shareholder wealth can be enhanced Docsity.com When it can’t be fixed • Divest • Liquidate Docsity.com DIVESTITURE & LIQUIDATION STRATEGIES • Situations arise when one or more subsidiaries have to be sold or shut down – Misfits cannot be completely avoided – Industry attractiveness changes over time – Subpar performance of some subsidiaries is bound to occur – Diversification appearing sensible based on strategic fit lacks compatibility of values essential to CULTURAL FIT Docsity.com Divestiture • Spin off • Sale Docsity.com STRATEGY OF MULTINATIONAL DIVERSIFICATION DIVERSITY of BUSINESSES & DIVERSITY of NATIONAL MARKETS • Presents a big strategy-making challenge Distinguishing Characteristic Docsity.com MULTI-NATIONAL DIVERSIFICATION: THE 1960s • Multi country approach • Management tasks at headquarters focused on – Finance functions – Technology transfer – Export coordination • Primary competitive advantage of an MNC - Ability to transfer certain skills from country to country efficiently & cheaply • MNC’s market position in a country negotiated with host government, not due to pressures of international competition Docsity.com MULTI-NATIONAL DIVERSIFICATION: THE 1970s • Traditional MNCs driven to integrate operations across national borders • Manufacturing a complete product range in each country became less prevalent • Gains in manufacturing efficiencies from converting to world-scale plants more than offset increased international shipping costs • In many industries, firms moved to locate plants in low-wage countries to achieve labor cost savings Docsity.com